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43 Cards in this Set
- Front
- Back
Balance sheet vs. income statement in terms of time
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Balance sheet: snapshot (moment in time)
Income statement: video sequence (period of time) |
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The balance sheet identity
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Assets ≡ Liabilities + Stockholders Equity
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What's wrong with the following:
Current assets $100 Long term assets $250 Current liabilities $50 Long term liabilities $200 Shareholders' equity $50 |
Assets not equal to liabilities + equity, in this case the equity should actually be $100.
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How is shareholders' equity determined?
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Assets - liabilities
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In what order are liability and equity obligations met?
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Liabilities are paid first, anything left over is equity.
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List types of current assets in order of highest to lowest liquidity
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Cash and equivalents
Accounts Receivable Inventories Other |
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List types of fixed assets in order of highest to lowest liquidity
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Property, plant, and equipment (less depreciation)
Intangible assets and other |
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Three concerns of a financial manager when analyzing balance sheet
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Liquidity
Debt vs Equity Value vs Cost |
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Liquidity
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Ease and quickness with which assets can be converted to cash without significant loss in value
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Which type of assets are most liquid?
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Current assets (in particular, cash and equivalents).
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Which has lower rates of return, fixed or liquid assets?
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Liquid
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Debt vs. Equity in a nutshell
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Creditors have first claim on cash flow, shareholders' equity is residual difference between assets and liabilities.
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Value vs. Cost in a nutshell
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Under GAAP, financial statements carry assets at cost. Market value is price at which assets, liabilities, and equity could actually be bought or sold.
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Is cost same as value?
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No, market value is usually much different than historical cost.
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Accounting definition of income
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Income ≡ Revenue - Expenses
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Primary parts of an income statement
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Operating
Non-operating Taxes Bottom line (net income) |
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Items on the operating section of income statement
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Total operating revenues
Cost of goods sold Selling, general and administrative expenses Depreciation -------- Total operating income |
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Items on the non-operating section of income statement
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Other income
Earnings before interest and taxes Interest expense --------- Pretax income |
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Items on taxes section of income statement
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Current taxes
Deferred taxes |
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Bottom line of income statement
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Net income =
Total operating income + other income - interest expense - taxes |
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Three things to keep in mind when analyzing income statement
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GAAP
Non-Cash Items Time and Costs |
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GAAP
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Generally accepted accounting principles
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Matching principle of GAAP
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revenues must be matched with expenses, so income is reported when it is earned (even though no cash-flow may have occurred yet)
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Why is income reported when it is earned instead of when cash-flow occurs?
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Matching principle of GAAP
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Non-Cash items
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Depreciation, deferred taxes, items for which no actual cash-flow occurs.
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Why is net income not cash
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Includes non-cash items such as depreciation and deferred taxes
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Time and costs (income statement analysis)
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in the short run some assets are fixed and some are variable, in the long run all assets are variable. Financial accounts don't distinguish between fixed and variable. Instead classified by product costs and period costs.
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Marginal tax rate
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Percentage paid on next dollar earned
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Average Tax rate
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Tax bill / taxable income
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Net working capital
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Net working capital ≡ current assets - current liabilities
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Growth in net working capital
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Difference between net working capital measured at two points in time (i.e. two different balance sheets)
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From finance perspective, most important item that can be extracted from financial statements
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Cash flow
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Cash flow identity
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CF(A) ≡ CF(B) + CF(S)
Cash flow from assets is equal to the cash flow from the creditors and stockholders |
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In the cash flow identity, what is and what's included in CF(A)
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Cash flow from the firms assets:
operating cash flow - capital spending - additions to net working capital |
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In the cash flow identity, what is and what's included in CF(B)
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Cash flow to the firms creditors:
interest plus retirement of debt minus long-term debt financing |
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In the cash flow identity, what is and what's included in CF(S)
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Cash flow to the firms stockholders:
Dividends plus repurchase of equity minus new equity financing |
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Operating cash flow
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EBIT + depreciation - taxes
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Capital spending
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Acquisition of fixed assets - sales of fixed assets
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Statement of cash flows
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Official accounting statement, helps explain change in accounting cash
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Components of statement of cash flows
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Cash flow from operating activities
Cash flow from investing activities Cash flow from financing activities |
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Cash flow from operations
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Net income + non-cash items + adjustments to current assets and liabilities other than cash
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Cash flow from investing
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Changes in assets:
acquisition of fixed assets (negative cash flow) and sales of fixed assets (positive cash flow). Called net capital expenditures |
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Cash flow from investing
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Changes in equity and debt
Retirement (-) Proceeds from long-term debt sales (+) Dividends (-) Repurchase of stock (-) Proceeds from new stock issuance (+) |